Asset–Liability Committee (ALCO)

The Asset–Liability Committee (ALCO) is a key internal management committee within banks and financial institutions responsible for strategic balance sheet management. It plays a central role in managing risks arising from mismatches between assets and liabilities, particularly interest rate risk, liquidity risk and foreign exchange risk. In the context of banking, finance and the Indian economy, ALCO is a critical mechanism for ensuring financial stability, profitability and regulatory compliance.
ALCO functions as the apex decision-making body for asset–liability management (ALM), aligning a bank’s business strategy with its risk appetite and macroeconomic conditions.

Concept and Purpose of ALCO

The Asset–Liability Committee is a senior-level committee typically comprising top management executives, including the Managing Director or Chief Executive Officer, Chief Financial Officer, Chief Risk Officer and heads of treasury, credit and operations. Its primary purpose is to optimise the composition of assets and liabilities to achieve sustainable earnings while maintaining adequate liquidity and controlling risk.
The core objectives of ALCO include:

• Ensuring sufficient liquidity to meet obligations
• Managing interest rate and market risks
• Maintaining optimal maturity profiles of assets and liabilities
• Supporting profitability within regulatory constraints

In banking and finance, ALCO serves as the bridge between risk management and business growth.

Role of ALCO in Banking Operations

In banks, ALCO is responsible for overseeing balance sheet dynamics on an ongoing basis. Since banks primarily operate by transforming short-term liabilities (deposits) into long-term assets (loans), they face inherent maturity and interest rate mismatches. ALCO monitors these mismatches and takes corrective measures.
Key operational roles of ALCO in banking include:

• Monitoring asset–liability gaps across time buckets
• Reviewing deposit and lending rate strategies
• Managing liquidity buffers and statutory reserves
• Overseeing funding plans and resource mobilisation

Through these functions, ALCO ensures that banks remain solvent, liquid and resilient to market shocks.

Asset–Liability Management Framework

ALCO operates within the broader asset–liability management framework, which involves systematic measurement, monitoring and control of risks arising from balance sheet mismatches. The framework relies on analytical tools such as gap analysis, duration analysis and stress testing.
ALCO reviews:

• Maturity and repricing profiles of assets and liabilities
• Sensitivity of earnings and economic value to interest rate changes
• Liquidity coverage under normal and stressed conditions

In India, banks are required to implement ALM systems in line with Reserve Bank of India (RBI) guidelines, with ALCO acting as the supervisory authority for ALM policies.

ALCO and Interest Rate Risk Management

Interest rate risk is a primary concern for banks, as changes in interest rates directly affect net interest income and asset values. ALCO formulates strategies to manage this risk by adjusting pricing, maturity structure and portfolio composition.
ALCO decisions related to interest rate risk include:

• Setting internal interest rate benchmarks
• Determining fixed versus floating rate exposure
• Managing repricing gaps across tenors

In the Indian financial system, where monetary policy changes influence lending and deposit rates, ALCO plays a vital role in transmitting policy signals into bank balance sheets.

Liquidity Risk Management and ALCO

Liquidity risk arises when a bank is unable to meet its obligations as they fall due. ALCO is responsible for ensuring that adequate liquidity is maintained at all times without compromising profitability.
ALCO oversees:

• Cash flow projections and liquidity gaps
• Compliance with liquidity ratios such as Liquidity Coverage Ratio (LCR)
• Contingency funding plans during stress scenarios

Effective liquidity management by ALCO is essential for maintaining depositor confidence and preventing systemic disruptions in the banking sector.

ALCO in Financial Institutions Beyond Banks

While ALCO is most commonly associated with banks, it is also present in non-banking financial companies (NBFCs), insurance companies and development financial institutions. These entities face similar asset–liability mismatches, though the nature and intensity of risks may differ.
In NBFCs, ALCO focuses on:

• Managing dependence on market borrowings
• Aligning long-term lending with short-term funding
• Addressing refinancing and rollover risks

The importance of ALCO in NBFCs has increased in India following liquidity stress episodes in the financial sector.

Regulatory Framework in the Indian Context

The functioning of ALCO in India is guided by RBI regulations and supervisory expectations. RBI mandates banks to constitute an ALCO and define its roles, responsibilities and frequency of meetings.
Key regulatory aspects include:

• Periodic ALM reporting to RBI
• Board oversight of ALCO decisions
• Integration of ALCO policies with risk management frameworks

These regulations aim to strengthen internal governance and reduce systemic risks arising from poor balance sheet management.

ALCO and Macroeconomic Stability

At the macroeconomic level, the effectiveness of ALCOs across banks influences credit availability, interest rate transmission and financial stability. Well-functioning ALCOs enable banks to respond prudently to economic cycles, inflationary pressures and monetary policy changes.
In the Indian economy, ALCO decisions affect:

• Credit growth and sectoral allocation
• Stability of deposit and lending rates
• Resilience of banks during economic downturns

Thus, ALCO indirectly contributes to sustainable economic growth and financial sector soundness.

Challenges in ALCO Functioning

Despite its importance, ALCO faces several challenges in practice. These include data limitations, rapidly changing market conditions and conflicts between growth objectives and risk control.
Common challenges include:

• Managing volatility in interest rates and liquidity
• Balancing profitability with regulatory compliance
• Integrating risk analytics with strategic decisions
• Coordinating across multiple business verticals